Latest G10 Macro Rates Blog – After the Endgame
With Shayne Dunlap, Co-Portfolio Manager
Some major central banks have started hinting they are approaching the monetary endgame, what next?
The recent remarks from Draghi and Kuroda are quite telling – both are recognizing the limitations of what further cuts to Monetary Policy & QE can effectively achieve in their 3rd or 4th iterations.
The concept of a “reversal rate” is suggesting there is a level beyond which lower interest rates become damaging to the economy and increasing number of observers believe that some countries are approaching that level. Similarly, the pushback from some council members towards QE infinity is its perceived damage to market liquidity and ultimately breaking rules like the capital key.
Draghi was signing off after the latest policy changes, not only in his term as the ECB president, but also in what else the ECB could do to promote growth. He was pleading with European governments to enact further structural reforms and, especially those with surpluses, namely Germany, to aid the economic stabilisation and recovery by dropping their fiscal rectitude and start spending.
Kuroda has repeatedly spoken of the many options available to the BoJ in adding to the measures taken so far in trying to attain a 2% inflation target. However, the BoJ has been noticeably hamstrung by its lack of cutting and is wary of hurting the domestic banks and savers. Their only effort recently has been tweaking the curve steeper via rinban (bond buying) operations.
The Federal Reserve has more potential to cut, but Powell’s messaging continues to signal they are reticent to cut rates dramatically further or restarting QE. He also doesn’t need to plea to the government to pick up the fiscal slack, as both political sides are happy to increase spending but reluctant to back it with higher taxes. Any significant changes on the fiscal front, however, will require support from the increasingly partisan Congress.
What does this do to debt levels? They are likely to explode higher. In 2020 the US national debt to GDP is forecast to be 110% (before 2008 it was 40%), the UK at 90% (highest since 1960), Europe 79% and Japan a staggering 249%. Countries with trade surpluses and a high domestic savings rate can sustain high debt ratios and whilst gross debt measures may dramatize the situation, not all the countries mentioned fit that description. Could we be inexorably heading to levels where markets lose faith in the fiat system? Could some major players coordinate a big debt write-off at the same time or do a gradual 5% per annum to limit the FX fallout? Could it be that gold, other tangible assets or stable coins backed by these become a viable alternative? The G4 have for many years had the luxury of being liquid reserve currencies needed by all, but the endless increasing of debt unchecked may ultimately undermine that confidence and demand.
The next major increase in global debt may involve a more direct transfer of financial stimulus to the masses, as advocated by proponents of MMT, Peoples QE and UBI. The pressure on politicians to spread wealth more evenly means the odds are increasing of this suggested evolution of policy.
The next decade will likely bring further political upheaval, debt blowout and market instability. We think in the last decade, economic progress and market performance was defrauded by debt blowout and Central Bank unconventional policy, and consequently, confidence in fiat money is being progressively eroded.
As the little boy said
“Why is the Emperor not wearing any clothes?”
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